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Climate Change and the Fossil Fuel Divestiture Movement

Bill McKibben and Tom Steyer are helping to assemble an army of students and activists to take on the investment establishment over climate change and push endowments, foundations and other institutions to divest their holdings in fossil fuel companies.

The Golden State was in the midst of its worst drought on
record when University of California freshman Jake Soiffer took
the microphone during the public statement session of the UC
Board of Regents meeting in San Francisco last November.
The topic of his comments to the 26-person committee that
oversees the state university system: climate change.

Soiffer told the UC regents at that meeting  which
happened to coincide with the United Nations Warsaw Climate
Change Conference  that youth are challenging their
own institutions and communities to take action to halt the
devastating effects of climate change, spurred by the
inability of governments to deal with the issue.

The Berkeley freshman is one of about 100 students spread
across the University of Californias nine campuses who
are pushing for the institution to take a stand on climate
change. They want the UC system to divest its $86 billion
portfolio of the worlds 200 largest fossil fuel companies
to send a clear political message that the business of these
companies is not morally or financially sustainable. Addressing
the Board of Regents meeting was just the start. By the
time I leave Berkeley, I want to see UC divest from fossil
fuel, says Soiffer.

Three thousand miles away from Berkeley, at Middlebury
College in Vermont, student groups and faculty members also
have been pushing for their school to divest from fossil fuel
companies. With a nearly $1 billion endowment, Middlebury
is dwarfed by the UC system, but it has a reputation as a top
liberal arts college and a prestigious board and alumni
network. The school boasts the first environmental studies
program in the U.S., and many of its students identify closely
with Vermonts intense environmentalism. Middlebury junior
Fernando Sandoval Jimenez, who is majoring in environmental
studies and geography, is confident that he and his fellow
student activists will be successful in forcing
divestiture.

We know it is going to be a fight, but we are prepared
for the fight, he says.

Over the past two years, students at approximately 400 U.S.
campuses have been pushing their universities and colleges to
divest from the fossil fuel industry. The divestiture movement
has spread to municipalities and public pension funds. Not
since the campaign to make institutions divest from companies
doing business in apartheid South Africa  a
three-decade-long effort, which the fossil-fuel-free movement
looks to as a model  has one issue ignited such a
firestorm. To date, most institutions of any size have resisted
calls to divest, but the movement is challenging these
organizations to look seriously at how they allocate their
assets and to reconsider some of their most closely held
beliefs. For the student and environmental activists,
divestiture has a political objective: to get lawmakers in
Washington to put policies in place that will force fossil-fuel
companies to change their behavior.

The idea that you can build a movement that will
fundamentally alter the political context in which decisions
are made is proven by South Africa, says writer and
scholar Robert Massie IV, a champion of the carbon divestiture
movement and president of Boston-based think tank New Economy Coalition. With climate change,
he adds, the planet is facing a fundamental crisis that
our political and economic system does not seem capable right
now of addressing.

The ranks of respected investors
and economic thinkers concerned about the financial risk of
climate change are growing. In October longtime hedge fund
manager Thomas Steyer, former Treasury secretary and Goldman
Sachs Group CEO Henry Paulson Jr. and ex-mayor of New York
Michael Bloomberg announced they were forming an initiative
called Risky Business to assess the economic
impact of climate change. Another former Treasury secretary and
Goldman chief, Robert Rubin, is advising them on their efforts.
Robert Litterman, former head of risk for Goldman Sachs, has
long been concerned about the imminent danger of climate change
to corporate balance sheets. Hedge fund manager George Soros
and Microsoft Corp co-founder Bill Gates are among the
billionaire philanthropists alarmed by what is happening to our
environment, as are investors
Jeremy Grantham, co-founder of Boston-based GMO, and Christopher Hohn, founder of
London-based hedge fund firm The Childrens Investment
Fund Management (UK).

Concerns about a warming planet go back to the 1950s, when
scientists started developing tools to monitor the effects on
the atmosphere of carbon dioxide, a by-product of burning the
fossil fuels, such as coal and oil, that have powered
industrialization. Carbon dioxide is called a greenhouse gas
because it traps heat and causes the Earth to get warmer.
(Rising levels of methane and nitrous oxide have also
contributed to the problem.) In 1950 there were about 280 parts
per million (ppm) of carbon in the atmosphere. Scientists
estimate that 350 ppm is the maximum safe level. Today the
carbon in the atmosphere is at nearly 400 ppm. (See also
"
Climate Change and the Years of Living
Dangerously.")

In 2008, frustrated by the lack of change in Washington and
the slow pace of the environmental movement,
writer-turned-activist Bill McKibben, a scholar-in-residence at
Middlebury, used the 350 number as a rallying cry for where the
world needs to be: He co-founded grassroots nonprofit group 350.org. Since 2012, 350.org has moved to
the forefront of the carbon divestiture movement, with the
charismatic but aloof McKibben as its most valuable spokesman.
Most of the time, environmental activists are playing
defense against the fossil fuel industry, he says.
Divestiture is an opportunity to play offense.

McKibben builds his case for divestiture on three crucial
numbers: 2 degrees Celsius, 565 gigatons and 2,795 gigatons.
Two degrees Celsius is the broadly agreed-upon maximum amount
of warming that the planet can take before things get really
bad; 565 gigatons is the amount of carbon that, released into
the atmosphere, would get the world to that level; 2,795
gigatons is the amount of carbon deposits that energy companies
currently have on their books.

McKibbens math is troubling. Since 2011 the U.K.-based
nonprofit Carbon Tracker Initiative has published a
series of reports demonstrating that the fossil fuel reserves
currently owned by global energy companies exceed 565 gigatons.
In its most recent study, the group estimates that the 200
largest oil and gas and mining companies spent
$674 billion in the past year to find and develop new
fossil fuel reserves. If governments regulate carbon emissions,
the value of these reserves will drop significantly. The Carbon
Tracker reports have helped to popularize the term
stranded assets to describe the carbon risk that
energy companies have on their books  suggesting that the
excess carbon is a bubble waiting to burst.

Yet for those investors
who take Carbon Trackers warnings to heart, what to do
about the problem is far from obvious. Although the arguments
about climate risk might be compelling, there is still plenty
of money to be made in energy companies. Attractive options
include investing in
emerging-markets energy securities and companies positioned
to benefit from the boom in hydraulic fracturing, or fracking,
which has the potential to make the U.S. energy-independent and
is already providing a boon to economically strapped states
such as North Dakota. In the same way that there was plenty of
money to be made in U.S. subprime mortgages before there
wasnt, many investors
see a lot of opportunities right now in the energy sector.

The way most institutions allocate their assets presents a
significant obstacle to divestiture. The endowment style of
investing was popularized during the past quarter century by
David Swensen, CIO of Yale Universitys $20 billion
fund. The Yale model favors active management and
diversification of revenue streams  especially among
alternative assets such as hedge funds, private equity and real
assets like oil and other commodities. Endowment investment
professionals are very resistant to the idea of divesting from
any stock or sector. They believe that the markets and
professional money managers are the best judges of an
assets inherent value and that setting limits on where a
manager can invest will almost always lead to losses.

Paula Volent, a Swensen protégée who heads the
$1 billion endowment at Bowdoin College in Brunswick,
Maine, echoed the views held by most of her colleagues when she
told the Bowdoin school newspaper in February 2013 that
divesting from the 200 largest publicly traded fossil fuel
companies would have reduced investment returns by 5 percent a
year over the preceding decade, costing the school more than
$100 million. To the minds of such investors,
divestiture is fiducially irresponsible.

The endowment investment model is not infallible. Many of
its practitioners, including Swensen, stumbled in 2008, when
they failed to predict the profound economic impact of the U.S.
housing market crash. Joshua Humphreys, president and senior
fellow of Croatan Institute, a Durham, North
Carolinabased research center, contends that investors
are making an even greater mistake with carbon risk. Even at a
school like Yale, which is investing in green energy, Humphreys
says, they remain beholden to investing in the carbon
economy as part of their diversification strategy. He
adds that the analysis of the carbon bubble sounds
completely incompatible with their strategy. Some
foundations, however, are starting to switch their portfolios
out of carbon and reinvest those funds in green technologies.
Humphreys is hopeful that these foundations will become the
investment leaders of tomorrow.

For most environmental activists tomorrow is too late. They
assert that the United Nations 21st Conference of the Parties
on Climate Change, which takes place next year in Paris,
will be the very last opportunity for governments to come
together and solve the problem of a warming planet. Yet the
political climate in the U.S. and elsewhere continues to make
it virtually impossible for climate change policy, such as a
tax on carbon emissions, to gain traction. Thats why, for
most environmental activists, the primary goal of fossil fuel
divestiture is to change political, not investment,
behavior.

As a political movement, the divestiture campaign is as much
about social equality and power as it is about climate change.
Many on the front lines want to take back power from government
and large corporations and address socioeconomic imbalances and
oppression. (The last, not coincidentally, can be all the more
severe in a resource-rich economy: Witness the political regime
in Russia and the environmental degradation and corruption
taking place in Nigeria.) As Berkeley student activist Ophir
Bruck explains: We are focused on climate justice, not
just climate change. Climate is the symptom of a systemic
problem of social inequality.

Achieving change in the current political environment, which
allows for big spending by corporations and other interested
parties, requires money. The environmental movement finds
itself in the ideologically uncomfortable position of
harnessing a community of activists, many of whom support
campaign finance reform and economic and social equality, while
needing the deep pockets of überwealthy finance
types like Rubin and Steyer. Yet the very presence of those
financial leaders could force others in the investment
community to take action.

The San Francisco Bay Area has a long history of social
activism, but few events were as emotionally charged as the
June 1990 speech by Nelson Mandela before a packed crowd at the
OaklandAlameda County Coliseum just four months after his
release from a South African prison. Mandela, who had spent 27
years behind bars, thanked the audience for its solidarity and
the role Californians were playing in putting economic pressure
on the South African government to end apartheid.

We salute the state of California for having such a
powerful, principled stand on divestment, Mandela said,
as the throng roared its approval.

The anti-apartheid divestiture campaign started in the U.S.
in the late 1960s after it became clear that Washington was not
going to impose economic sanctions against the segregationist
South African regime. By the late 70s student activists
across the U.S. were calling for their universities to divest;
they were supported in their efforts by labor unions.
Berkeleys students were among the most active protesters,
holding daily rallies in the campuss Sproul Plaza and
building an imitation shantytown to illustrate the injustices
endured by South Africas black community. On July 18,
1986  Mandelas birthday  UCs regents
voted 13-to-nine to pull all of the systems money from
companies with links to South Africa or Namibia. It was a
landmark decision, targeting more than $3.1 billion of
stocks and bonds.

Bob Massie, who visited postapartheid South Africa on a
Fulbright grant and wrote a 1997 book, Loosing the Bonds:
The United States and South Africa in the Apartheid Years,
believes divestiture was instrumental in leading to the
dismantling of the segregationist regime. He contends that
pressure from divestiture created a political climate in which
House and Senate Republicans and Democrats could join to pass
legislation imposing sanctions on South Africa and then
override president Ronald Reagans veto of the bill. The
sanctions weakened South Africas economy, causing the
countrys president, F.W. de Klerk, to begin negotiations
with Mandela and other members of the African National Congress
and leading to the end of apartheid in 1994. Massie is hopeful
that the climate-change-divestiture movement can provide an
equally effective catalyst.

But at the same time the university endowments found
themselves at the forefront of the apartheid debate, they were
undergoing a radical shift in how they invested, to the
endowment model, which would make it extremely difficult for a
divestiture movement of a similar scale to ever happen
again.

Yale hired Swensen to run its then-$1.3 billion
endowment in 1985. Fresh off six years of developing structured
products on Wall Street, the universitys new investment
chief applied Modern Portfolio Theory to what had been an
old-school way of investing, largely using fixed income and
cash, with the goal of achieving the best possible returns with
the lowest amount of overall portfolio risk. Diversification,
especially among more-­volatile, equity-based strategies
such as hedge funds and private equity, is key. So successful
was Swensen at Yale that investors
all over the world soon adopted the endowment approach.

For proponents of carbon divestiture, the ascent of the
endowment model had two very profound consequences. The first
was that, with a grounding in rational market theory, faith in
the security selection of its managers and an emphasis on
diversification, the endowment-style investor rejected the
notion of making decisions based on ethical or other seemingly
nonfinancial factors. Subsequent, unsuccessful forays into
divestiture  particularly in regard to tobacco stocks
during the 1990s and early 2000s  would only serve to
strengthen their conviction.

A second consequence was the rise of alternative-investment
managers and the adoption of commingled funds. In the 1980s
most institutional investors
held a mix of stocks and bonds; a significant percentage of the
money was indexed and passively managed. More often than not,
actively managed money was  especially for larger
institutions  kept in separate accounts. This meant that
for the most part trustees and board members knew exactly how
their institutions money was invested. If, say, they
chose to divest from a company, it was a relatively simple
process to identify their holdings and unwind them. Also,
because funds were held separately, no other investors
had to divest.

The rise of the endowment model was a gift to
alternative-investment managers in general and hedge funds in
particular: Institutional money flowed into their coffers and
provided high fees. Farallon Capital Management was born out
of this industry transformation. Tom Steyer founded the firm in
1986 with $15 million in seed capital, mostly from the
partners of private equity shop Hellman & Friedman and
their clients. Yale was one of Farallons first outside investors;
other endowments followed. Today, Farallon has more than
$19 billion in assets.

The new approach to investing was more complex and
exclusive. As a result, more and more institutions,
particularly those that did not have Yales sizable
endowment, chose to outsource the management of their funds.
This led to the growth of so-called outsourced CIOs. Steyer has
a stake in one such firm, $27.6 billion Hall Capital
Partners, founded by his good friend and former colleague
Kathryn Hall.

Middlebury College is among the many schools that have taken
the outsourced CIO route. In 2005, Middlebury became one of the
first clients of Investure, a
Charlottesville, Virginiabased firm set up by Alice
Handy, who previously managed the University of Virginias
endowment. Handy intended to provide the sophistication of the
endowment model to midsize institutions by pooling their
capital and investing in a handful of actively managed funds,
selected and monitored by the Investure team. Hiring Investure
improved the Middlebury endowments investment returns,
but it would prove problematic down the road.

Middlebury, Vermont, is as remote as it is beautiful. The
Otter Creek Falls tumble in the center of the village, not
far from an old marble works. Middlebury College was founded on
the outskirts of town in 1800. During the winter months its
buildings of Vermont limestone, granite and marble blend with
the slate-gray skies and snow-covered terrain. Winters in
Vermont are not for the fainthearted. McKibben should know: He
has been a scholar-in-residence in Middleburys
environmental studies department since 2001.

Published in 1989, McKibbens The End of Nature was the first
book on climate change written for a general audience. In his
2013 book, Oil and Honey: The Education of an Unlikely
Activist, McKibben describes his recent decision to take a
more politically active stand: Sometime in the course of
the past decade I figured out that I needed to do more than
write  if this fight was about power, then we who wanted
change had to assemble some. Environmentalists clearly
werent going to outspend the fossil fuel industry, so
wed need to find other currencies: the currencies of
movement. Instead of money, passion; instead of money, numbers;
instead of money, creativity. But the movement also
needed something else  money.

In January 2005, Middlebury organized an on-campus
conference titled What Works New Strategies for a Melting
Planet. The three-day event aimed to develop an effective
means for combating climate change. Subsequently, McKibben and
a group of Middlebury students launched Step It Up, a 2007
grassroots action campaign, when citizens around the U.S. drew
attention to the issue of climate change and asked Congress to
act.

Step It Up was a program of the Sustainable Markets
Foundation, a New Yorkbased nonprofit headed by attorney
and political strategist Jay Halfon, who has links to Ralph
Nader. In 2008, the Sustainable Markets Foundation launched a
new project  350.org. It received a $100,000 grant from
the Rockefeller
Brothers Fund for the program. As 350.org got
under way, McKibben was appointed the Schumann Distinguished
Scholar at Middlebury. The position was funded by a
$1 million-plus grant from the Schumann Center for Media
and Democracy, a Montclair, New Jerseybased nonprofit
affiliated with the Schumann family and journalist Bill Moyers.
Bill [McKibben] decided he wanted to move from just
writing about the challenge to acting to confront it,
Moyers explains. He left the board in September of 2010
for that reason.

The grant was a way to underwrite Mc­Kibbens
mentoring role at Middlebury, which he had been doing on a pro
bono bases, Moyers says. It was undertaken at the Schumann
boards and not McKibbens initiative. Having
come to know him well over the previous decade, there was no
one we knew who possessed better credentials for such a role;
the boards loss was the environments
gain.

With the 2012 presidential elections under way and neither
Barack Obama nor Mitt Romney saying much of anything on climate
change, 350.org decided to make the controversial
Keystone XL
Pipeline a rallying point for the environmental movement.
At the time of the election, the White House, with guidance
from the State Department and the Environmental Protection
Agency, was under pressure to make a decision on whether to
approve an extension of the pipeline that would allow energy
company TransCanada to ship oil from Alberta to refineries on
the Gulf Coast. Environmental activists rallied on Washington
to draw a line in the tar sand.

Although the activists succeeded in raising the profile of
the Keystone Pipeline, their impact on the discourse of the
presidential campaign was limited. McKibben and his allies
realized that to have an impact on Washington they needed to
discredit the large oil companies that were spending billions
of dollars in lobbying fees and political donations.
Divestiture was their solution.

We are less of a movement than a series of
campaigns, McKibben says of 350.org. Part of any fight, he explains, is
calculations about power: who has it and how do you
change it. Part of this kind of fight is also changing the
zeitgeist. When change comes, change can happen
quickly.

For their part, activists and students were already
mobilizing. In the fall of 2010, the Washington-­based Wallace Global
Fund and Oaklands As You Sow came up with the idea of
starting a national fossil-fuel-divestiture campaign on college
campuses. Working with a coalition of other nonprofit
organizations, including the Brooklyn-based Responsible Endowments Coalition, founded
in 2004 by five student activists, the group devised a
divestiture strategy focused on ten coal-fired utilities and
five coal extraction companies, dubbed the Filthy 15. Students
at Swarthmore College, who had been working on their own
divestiture effort, joined the national campaign, along with
students at Brown University, Lewis & Clark College, the
University of Illinois, the University of North Carolina and
Vassar College. By January 2012 the group had been joined by
the California Student Sustainability Coalition and was
spreading across the U.S.

Through 2012 more and more student groups became
interested in divestiture, says Daniel Apfel, the current
executive director of the Responsible Endowments Coalition (REC).
Many of them were already on responsible-investment or
climate change campaigns on their campuses. This has just taken
it to a totally new level.

When Katie Hoffman joined UC Berkeley as a transfer student
in the fall of 2011, she brought the fossil-free campaign with
her. Hoffman, whose father, Paul, is a noted civil and human
rights attorney, had been active in the divestiture campaign at
her community college, but Berkeley had no such group. So
Hoffman, who graduated last June and now works as a campaign
director for the California Student Sustainability
Coalition, built one. To start with, we were just a
ragtag bunch of student activists, she says.

In June 2012, McKibben wrote an article for Rolling
Stone titled Global Warmings Terrifying New
Math. He helped expand the divestiture push from the
Filthy 15 to the entire Carbon Tracker 200, including companies
such as BP, Exxon Mobil Corp. and Royal Dutch Shell. After the
U.S. presidential elections in November, Mc­Kibben embarked
on a nationwide Do the Math tour, based on the
material in his Rolling Stone article. The tour
featured special guests, including Archbishop Desmond Tutu and
Canadian author Naomi Klein, who was instrumental in
formulating the plan for 350.org to target divestiture. It stopped
at university campuses, high school auditoriums and other
venues.

Sandoval Jimenez, in his first year at Middlebury at the
time, was among a group of students who took a bus to hear
McKibben speak in Burlington, Vermont. Already passionate about
environmental issues, Sandoval Jimenez, the son of Mexican farm
workers, says he came away from the talk in shock: I
thought to myself, I cant believe Middlebury profits from
fossil fuels while advocating for a world without them.
He immediately got involved with the on-­campus divestiture
efforts.

Cal senior Ophir Bruck heard McKibben speak on the Berkeley
leg of the tour. He vowed to get more involved and was invited
to join Cal Students for Sustainable Investment by Hoffman, who
was in his class on social inequality, taught by former Clinton
administration Labor secretary Robert Reich.

The divestiture movement, and McKibbens prominence in
it, presented a problem for Middlebury. On the one hand, the
university, its board of trustees and the administration were
proud of the schools reputation as a leader on
environmental issues. On the other, they took their
responsibility as fiduciaries of the $1 billion endowment
equally seriously and did not want to do anything that was not
completely financially sound. Middlebury president Ronald
Liebowitz and chief financial officer Patrick Norton felt the
best way forward was to have an open, honest debate.

My only request is that students do the
math  that they get the full picture, says
Liebowitz. He wanted them to consider, for example, the
potential economic hardship from rising coal prices for people
living on the poverty line in developing countries.

The Middlebury students already had a Socially Responsible
Investment Club. In 2010, working with REC and others, they had
encouraged Investure to launch a sustainable-investment fund.
In the spring of 2012, the students ran a campaign focused on
the endowments transparency and accountability, says
investment club member Jeannie Bartlett. The students began a
carbon divestiture campaign in earnest the following fall.

Under pressure from students to divest, the Middlebury
administration and trustees started reviewing the investment
portfolio to see their options. Our investment committee
was very engaged, says CFO Norton. The review took months
of work and found that only about 3.6 percent of the holdings
were in fossil fuel. Their most troubling exposure was to Coal
India, the largest coal producer and thermal coal reserve
holder in the world. The company is an activist position of
Hohns TCI hedge fund. Hohns thesis is that the
company is selling its coal for less than half of what others
charge and should raise the price. That would help force India
to transition to more-climate-friendly energy options.

It was pretty clear that Middleburys decision to
outsource management of its investments was a major obstacle to
portfolio­wide divestiture: The schools money is
commingled with that of other endowments and almost entirely
invested in active managers. In January 2013, Investure CEO
Handy attended an on-campus panel discussion to debate the
divestiture issue. For us divestiture is very difficult,
but it is not impossible, she explained.

McKibben participated in that panel, which he describes in
Oil and Honey: I spoke last,
after four investment professionals, and so we may have been
behind on points  but I had a couple of aces up my
sleeve. His best card by far was Tom Steyer.

At Farallon, Steyer discovered how determined environmental
activists could be when they worked with labor and student
protesters. In 2002 his firm became the target of protests
focused largely on a co-investment it had made with Yale in a
Colorado-based water development project. Farallons
critics contended that the investment was damaging the
environment. By then Steyer and his wife, Kat Taylor, had
already become interested in issues relating to the
environment.

In October 2012, Steyer announced that he would retire from
Farallon at the end of that year. He wanted to commit himself
full-time to environmental activism. A few months later he was
backing McKibben in the environmentalists call for
Middlebury to divest, writing  in a letter addressed to
the schools trustees that McKibben read aloud at the
public forum  that taking money away from fossil fuel
companies was a sound investment decision.

After much discussion and deliberation, president Liebowitz
last August published an open letter to the Middlebury
community. In it he explained that the endowment had chosen not
to divest from fossil fuel companies but pledged to work to
develop principles around environmental, social responsibility
and corporate governance (ESG) issues, to be applied to both
the fund and the college. The endowment, he said, would
increase its investments in ESG-type funds, including a
commitment to green energy and clean technology. Two student
representatives would be allowed to attend the investment
committee meetings, and a small portion of the endowment would
be allocated to students to invest in an ESG-friendly way. The
college also pledged to apply ESG principles to itself. It is
undergoing a review of its own corporate governance practices
and procedures.

The Middlebury students are pleased with the gains they have
made but adamant that they will keep the conversation going and
continue pushing for divestiture. CFO Norton is planning a
final panel discussion, scheduled to take place this month,
that will focus on ESG investing as well as the views of
investment professionals on fossil-fuel-free strategies.
We are an educational institution, so we are going to
address the issue, Norton says. President Liebowitz says
he was surprised by how many college administrations refused to
discuss the issue with students. I felt we all
benefited from the debate, he adds.

In early October, Harvard University president Drew Gilpin
Faust issued a statement on the Cambridge, Massachusetts,
schools $32 billion endowment. Faust dismissed the
idea of divestiture as neither warranted nor
wise. She questioned the whole divestiture strategy
and asserted that despite some assertions to the
contrary, logic and experience indicate that barring
investments in a major, integral sector of the global economy
would  especially for a large endowment reliant on
sophisticated investment techniques, pooled funds and broad
diversification  come at a substantial economic
cost.

Harvards student activists are continuing to fight for
change. They have gathered the support of some key advisers and
alumni, including former Securities and Exchange Commission
commissioner Bevis Longstreth, to help them make their case.
Students at Harvard arent only working on
divestiture; many of them also want the endowment to be more
transparent and more accountable, says RECs Apfel.
They believe that will actually produce better investment
results.

To McKibben the very fact that universities across the
country are talking about the issue is having an effect.
Nobody is saying, Fossil fuel is the best thing in
the world; we love buying coal and making money in the
process, he says.

At the University of California, the Fossil Free UC campaign is well under way.
The students of the universitys various campuses decided
to focus their divestiture efforts on the UC Board of Regents,
with its $85.7 billion in pension and endowment assets,
rather than targeting the individual endowments of the UC
schools. Starting in 2013 they began speaking in the public
comment sessions at the UC regents meetings. In May of
last year, the student body voted overwhelmingly to divest from
fossil fuels.

In December, Daniel Kammen, an energy professor at UC
Berkeley and director of its Renewable and Appropriate Energy
Laboratory, wrote an op-ed in the Daily Cal, the
universitys student newspaper, supporting the move.
The UC system should divest, says Kammen, who sees
the action as a way to start working with energy companies to
get them to adapt to a low-carbon future. We need an
industrial revolution. We know roughly the timetable, he
adds, referring to the scientific claim that the world must
reduce carbon emissions by 80 percent by 2050 to avoid a
catastrophic increase in global temperature. A huge
amount of expertise is needed to make that happen.

Kammen is helping to coordinate a UC faculty vote on
divestiture, which is planned for this spring. A faculty
vote that is successful would certainly call for action by the
regents, he says. In January four of the regents met with
some of the Fossil Free UC student activists, including
Bruck. He and the other students are hopeful that they can get
divestiture on the regents agenda as early as this
month.

Weather itself remains one of the biggest obstacles to
convincing people that the planet is getting warmer. James
Hansen, longtime head of the NASA Goddard Institute for Space
Studies in New York and the American scientist most closely
associated with climate change, identified the problem in a
2012 white paper titled Perception of Climate Change, in
which he explained that the natural variability of weather can
obfuscate the scientific fact of global warming. In his paper,
however, Hansen noted that weather patterns have changed so
much that a perceptive person old enough to remember the
climate of 19511980 should recognize the existence of
climate change.

Global warming is not just about heat. Scientists say it
also results in changing weather patterns, as evidenced by the
snowfall that blanketed much of the southeastern U.S. this
winter and by the U.K.s dramatic flooding. People tend to
equate more snow with cooler winters, but, Hansen writes,
observations confirm expectations that a warmer
atmosphere holds more water vapor, and thus warming may cause
snowfall to increase in places that remain cold enough for
snow.

With California experiencing its driest winter on record,
Governor Jerry Brown declared a state of emergency on January
17, 2014, saying, We cant make it rain, but we can
be much better prepared for the terrible consequences that
Californias drought now threatens, including dramatically
less water for our farms and communities and increased fires in
both urban and rural areas. He called for Californians to
voluntarily reduce their water consumption by 20 percent and
took steps to reduce water usage elsewhere.

Five days later 350.org and other groups, including the
California Student Sustainability Coalition, held the
California Divestment Forum at Berkeley, bringing together
students, environmental activists, elected officials and money
managers. The forum included city schoolteachers, who wanted
their pension assets divested of big energy companies, and
members of Occupy San Francisco (some of whom could remember
organizing on the Berkeley campus to protest South Africa), as
well as church leaders and community organizers. Bob Massie
gave the keynote address.

In addition to his other achievements, Massie, an ordained
minister and former Harvard Divinity School professor, was from
1996 to 2003 executive director of Ceres (founded
in 1989 as the Coalition for Environmentally Responsible
Economies). In 2003  aware that the Bush administration,
with its ties to big oil, would not take action on climate
change and that the Republican-led Congress was all but silent
on the issue  Massie co-organized the inaugural
Institutional Investor Summit on Climate Risk at the United
Nations. The gathering attracted some of the U.S.s most
influential institutional investors
 including state pension funds from California,
Connecticut, Maryland and New York, representing more than
$1 trillion in assets  to discuss climate change for
the first time. When a few months later the California Public
Employees Retirement System and the California State
Teachers Retirement System formally pledged to put
$1.4 billion into green-venture investing, it looked like
investors
attitude toward climate change might be starting to make a
seismic shift.

A decade later relatively little has changed. I think
we are running out of words to express how difficult and deep
and profound a challenge this is, Massie told the
Berkeley audience in January. And were also running
out of words to express, I think, our frustration at the
inability of governments and others to address a problem of
this magnitude. Even in the justification of a market system,
we are witnessing the largest market failure in
history.

Given the economic concerns, Massie continued, it is
only a matter of time before somebody takes a swipe at either a
group of fiduciaries or a group of pension consultants and says
the failure to address a fundamental, known, massive
destructive force is a breach of fiduciary duty and therefore
grounds for a lawsuit.

If climate-focused investing is going to storm the
barricades of the ivory tower and disprove the deep-seated
belief by most Modern Portfolio Theory practitioners that it is
a surefire way to lose money, it needs to produce thought
leaders and practitioners who are equal in stature to
Yales Swensen. The smattering of universities that have
voted to divest from carbon do not have capital pools of
sufficient size or credibility to qualify them as investment
leaders. A significant source of hope for the
sustainable-investment community is the number of foundations
that are starting to go fossil fuelfree or tilt their
portfolios away from carbon.

On January 30 a group of 17 foundations representing
$1.8 billion in assets announced that they would divest
from fossil fuel companies and reinvest those assets in the
green economy. Funds participating in the Divest-Invest Philanthropy campaign include
the Schmidt Family Foundation, the $304 million charity of
Google chairman Eric Schmidt and his wife, Wendy; the Wallace Global
Fund; and the Sierra Club Foundation. This is a
great opportunity for foundations to leverage the full range of
their assets, including investment capital, toward their
mission and prove the investment thesis that there are returns
in the green economy, says John Goldstein, co-founder of
San Franciscobased Imprint Capital Advisors, one of the few
investment consulting firms to focus on impact and ESG
investments and an adviser to the 17 foundations.

The Divest-Invest coalition members are not the only funds
forging a new trail. Foundations with an environmental focus
have an incentive to be among the thought leaders in responding
to climate change  all the more so if they have the
support of investment professionals who are passionate about
the cause. The Washington-based World Wildlife Fund is being particularly
innovative. Former Goldman Sachs risk chief Litterman, who has
become one of the foremost authorities on climate investment
risk, is a WWF board member. He has encouraged the fund to
consider the threat a carbon tax would pose to its
$330 million endowment. Rather than get tangled up in the
process of divesting, the fund has with Littermans
guidance hedged its exposure to the companies at greatest risk
from carbon pricing  those dealing with coal and tar
sands  through the over-the-counter derivatives market.
The derivatives contract, Litterman says, is a very
inexpensive and undisruptive way to eliminate carbon
risk. The fund is also seeking to invest directly in the
green economy, hiring managers such as London-based Impax Asset
Management.

By far the most important foundation to take a stand on
divestiture is the $840 million Rockefeller Brothers
Fund (RBF). The Rockefeller family made its original
fortune in the oil industry, but it has a long history of
philanthropic leadership, including a focus on the environment.
In 2008 members of the family helped lead a failed shareholder
engagement effort designed to get Exxon­Mobil, one of the
successor companies to John D. Rockefellers Standard Oil,
to start adapting its business model to better respond to
climate change. RBF, one of several family charitable
foundations, is a longtime client of Investure, but it has
begun redeeming its assets from the outsourced-CIO firm and
plans to invest in its own climate-friendly, fossil-fuel-free
portfolio.

For foundations like RBF that are supporting calls to divest
through their grant-making operations, there is a certain
pressure to walk the talk. The challenge is even more profound
for the financial professionals who are taking an active role
in the divestiture movement. GMO co-founder Granthams charity,
the Grantham Foundation for the Protection of the
Environment, gave $350,000 to 350.org in 2011, but GMO, which manages some money for the
foundation, continues to invest in the carbon economy. Former
hedge fund manager Steyer has funded 350.org through
the TomKat Charitable Trust and personally committed capital to
green investments through his family office. And yet Steyer
long had exposure to the fossil-fuel economy through his
investments in Farallon. At his request, Farallon has created a
fossil-fuel-free sleeve for its founders assets, but
divesting from the commingled fund will take time.

In public and private speeches, Steyer has stressed the need
to change the discourse in Washington and achieve new,
climate-friendly legislation. He believes that when the right
public policy is in place, the big energy companies will become
the lead innovators in pushing the change that is needed to
produce a fossil-fuel-free economy (in much the same way that
the breakup of the original AT&T Corp. helped result in a
technological revolution). Although the divestiture movement
may help bring into doubt the legitimacy of the big coal and
oil companies and raise questions about their long-term
suitability, it will need money to change the debate in
Washington. In 2013, Steyer launched NextGen
Climate Action Committee, a political action committee
(PAC) focused on climate change.

Super PACs came into being as a result of the 2010 decision
by the U.S. Supreme Court to overturn key elements of campaign
finance laws limiting the political giving of individuals,
corporations and unions. A Super PAC can raise unlimited funds
from any of these entities and spend them on any political
issue of its choosing, as long as that spending is not
coordinated with a candidates campaign. The energy lobby
has long used political spending to its advantage. ExxonMobil
is well known for doing so and for supporting the publication
of research critical of climate change. The Koch brothers,
Charles and David, who head Koch Industries, a privately held
conglomerate, are notorious for spending billons of dollars to
support conservative causes, including opposition to climate
change legislation.

In October thousands of youth leaders from around the U.S.,
including students from Middlebury and UC, came together in
Pittsburgh to attend Power Shift, a four-day conference
dedicated to climate change and social and economic justice
organized by the Energy Action Coalition, a Washington-based
alliance of student-led climate action groups. McKibben and
Steyer were among the keynote speakers. There were workshops
and concerts. The gathering had the feel of a political call to
action  shades of Obamas 2008 campaign or even the
end-apartheid rallies of the 1980s.

Steyer was part of the Saturday night Power Shift speaker
lineup. This is a political fistfight in an alley,
he told the audience, wearing a white button-down shirt and his
trademark red plaid tie. And the question is, How are we
going to win this fistfight Because we are up against the
biggest, richest industry in the history of the world.
His answer: We are going to win it with people.

Middlebury and Berkeley students at Power Shift say they
found the event inspiring and motivating. They were
particularly excited to coordinate with other divestiture
groups. Some felt a little uneasy after all the political
rhetoric; others were motivated to get more political. The
presence of Steyer did not go unnoticed. It bothers me
that people like him are in control of the movement, says
Berkeley freshman Soiffer, who since high school has been
actively involved in campaign finance reform. But
its a reliable tactic. You have to use money to fight
money.

In 2013, NextGen raised $9.3 million, all from Steyer,
and spent $8.25 million, focusing its efforts on races in
Virginia and Massachusetts. Now Steyer is raising funds to
target the 2014 U.S. congressional elections. An even more
high-profile target, however, is likely to be the 2016
presidential campaign. Any Democratic politician with
aspirations of being president can recall the damaging effect
that Green Party candidate Ralph Naders 2000 campaign had
on Al Gores efforts to win the presidency. Hillary
Clinton herself knows well how successful political fundraising
can be when combined with grassroots activism. With his Super
PAC and big-money contacts, Steyer has the potential to be an
important source of funds. He can also, through 350.org and the
carbon divestiture movement, tap into a whole network of
students and activists across the U.S.  a climate change
army mobilized for action.  

Comments (2)

If there's any person with the reasoned, well-formed opinions garnered by years of experience that we should all be listening to, it's definitely a college freshman.

Posted 04.16.14 9:40
Peter Murtha

Congratulations on one of the very best and most comprehensive articles I have seen on fossil fuel divestment. (As a former federal prosecutor and current climate/divestment activist interested in chasing down the facts, I have read quite a few!)

There is one point in the article that gives me pause. You note that the head of Bowdoin's endowment, Paula Volent, claims that divesting from fossil fuels would cost the $1 billion endowment $100 million dollars over ten years. A bit of internet research reveals that Bowdoin's endowment reportedly contains 1.4% fossil fuel investments. (See http://bowdoinorient.com/article/7968.) I am (clearly!) not an institutional investment expert, but I am extremely skeptical of her claim, especially when I see no public record of how she arrived at that figure. Framing divestment as "unaffordable" is a tack to cut-off debate at the outset that has been employed by many endowment and pension fund managers who view divestment as a yet another "headache" they would need to deal with. Yet the overwhelming majority of published research on the impacts of fossil fuel divestment on rate of return shows that in fact it causes little if any negative impact on the rate of return. Many college administrators have blithely ignored — but not even attempted to rebut — that research.

By repeating anew Ms. Volent's assertions of "endowment catastrophe" (my phrase) uncritically, I fear that you may perpetuate the myth that fossil fuel divestment is financially irresponsible. It is not, an opponents of divestment should be required to demonstrate how they come to their conclusions.